Indirect Tax
What is an indirect tax?
The colloquial and constitutional definitions of indirect tax are in conflict:
- Colloquially, an indirect tax refers to any tax collected by a third party before being forwarded to the government.
- In constitutional law, however, an indirect tax instead refers to a tax on an “event” or “transfer.”
What is the difference between an indirect and direct tax?
- Colloquially, a direct tax is any tax that is collected directly by the government. Direct taxes under this definition include estate tax, gift tax, property tax and some income tax. Whereas sales tax, value added tax (VAT), goods and services tax, and any other tax collected by an intermediary is an indirect tax. Indirect taxes are therefore sometimes defined as any tax that increases the price of a good or service.
- In constitutional law, a direct tax refers to a tax levied on property simply “by reason of its ownership.” Constitutionally, only real estate and other personal property taxes are considered direct taxes (taxes on proceeds from the sale of such property are not direct taxes). Whereas indirect taxes include all “event” taxes such as gift tax, estate tax, income tax, and excise tax.